Rising Home Sales Support Case for Housing Recovery

Home-sales data released Wednesday provided fresh support for the view that the strong start to the spring home-buying season marks the beginning of a recovery, not a temporary blip due to an unusually warm winter.

An index that measures the number of contracts signed to purchase previously owned homes rose in May to match its March level, which was the highest point in nearly two years. Pending home sales rose 5.9% from April and stood 13.3% above year-ago levels, according to the National Association of Realtors.

May’s reading showed strength in every part of the U.S. Contract activity stood at its highest level in more than one year in the Northeast, which was up by 19.8% from last year, and the Midwest, which was up 22.1%.

The pending home-sales report was the strongest for the month of May since 2006, when the housing bubble peaked. Since 2007, contract activity has been stronger only in five other months—three in 2009 and two in 2010—all in periods when federal tax credits fueled a surge in sales.

To be sure, contract activity has been a less-reliable indicator of future sales activity than it was in the past because many deals fall through, either because buyers can’t qualify for mortgages or because appraisals are too low. Also, some sellers need bank approval to complete a short sale, where the bank allows the home to sell for less than the amount owed.

Still, a growing number of economists say that recent housing indicators point to a market that is recovering. Dean Baker, co-founder of the Center for Economic and Policy Research who has long maintained a bearish outlook on housing, on Tuesday wrote that the sector “has hit bottom and started an upswing.”

Some homebuilders are sounding optimistic. Lennar Corp., LEN +5.28%the Miami-based builder, reported a sharply higher profit for the quarter ending May 31, buoyed by a 40% increase in new-home orders and a tax-related gain. “Evidence from the field suggests that the ‘for sale’ housing market has, in fact, bottomed and that we have commenced a slow and steady recovery process,” said Chief Executive Stuart Miller in a statement Wednesday.

Sales have been fueled in recent months by mortgage rates that have fallen to their lowest levels on record. The average 30-year fixed-rate mortgage stood at 3.88% last week, the Mortgage Bankers Association said Wednesday.